Listen to the interview:

Originally broadcast on ABC Radio National Breakfast with Patricia Karvelas on Wednesday 24 January 2024.

• Patricia Karvelas, Host, ABC Radio National Breakfast
• Richard Denniss, Executive Director of the Australia Institute
• Innes Willox, Chief Executive at Australian Industry Group

Please note this transcription is automated and some errors may occur

Patricia Karvelas:

A broken promise or breaking with a broken policy? Prime Minister Anthony Albanese made such a point of sticking with the Coalition’s stage three tax cuts that any move to alter them is guaranteed to generate a political firestorm. And we’ve already had a bit of a taste of that this morning.

The full details of the policy won’t be announced until tomorrow, but we know the government will provide greater tax relief for people on lower incomes at the expense of those on higher incomes. There will be a shift. The extent of the shift is yet to be revealed. Already, the opposition and business groups have come out strongly against the changes, but do they make economic sense or will they be more fair than what was already proposed in legislation?

To debate these issues we’re joined this morning by Innes Willox, the chief executive of the Australian Industry Group, and Dr Richard Denniss, the executive director of the Australia Institute, the group that’s been arguing against keeping stage three. Welcome to both of you.

Richard Denniss & Innes Willox: 

Good morning. Good morning Patricia.

Patricia Karvelas:

Alright Richard, we’re going to start with you. The Prime Minister gave his word that these tax cuts would remain as legislated and I suspect that the Liberal party’s already designing their advertisement campaigns. Of all of those grabs of him saying this, he said, my word is my bond. Isn’t that game over? Politically speaking, why do you think this is an important moment?

Richard Denniss:

Oh, well let’s start with the big picture. We’re in the middle of a cost of living crisis and this is absolutely the right thing to do, not just for the economy, but for the individuals who are suffering the most. Is it going to be politically deadly for the Prime Minister to give the vast majority of Australians far bigger tax cuts than previously? I don’t think so. Has he broken a promise? Yes, but it was an inappropriate promise.

It was a policy designed by Scott Morrison seven years ago before Covid, before a cost-of-living crisis, before real wages fell for consecutive years. So yes, it’s a broken promise but it’s still a very good idea and while we’ll have to wait and see the details, I think if the Prime Minister’s going to take money off people earning over $200,000 and give significantly bigger tax cuts to people earning normal incomes, I think this is going to be a political winner for him.

Patricia Karvelas:

Okay, that’s interesting. Innes, obviously there an acknowledgement from Richard Denniss that it’s a broken promise. So let’s not debate whether it is because the Prime Minister has said many times he doesn’t want to change these tax cuts. He now plans to. Why are you opposed to the change?

Innes Willox:

Well, Patricia, there’s real concern here that this is going to be the death knell for tax reform in Australia.

We are amongst the highest, most reliant countries in the world on income to fund government coffers. I think we run only second to Denmark of developed countries in our reliance on income tax reform. This was a well thought through process, which has gone through two election cycles supported by both parties and the signals had been that this would be put through.

The room was always left open for the government to take other measures to support parts of the economy, parts of the community that they felt were most at need. But the concern here, Patricia, is walking away from this promise means that tax reform, which we need is basically a dead duck. We’ll look at a couple of issues. What was proposed here was a flattening out a simplification of the taxation system so that people earning between 45,000 and $200,000 were paying the same tax rate 30%.

Well, that from reports is now not going to happen. We’re still going to have a four-tier tax system, which continues to create issues around what is known as ‘bracket creep’, people moving into new tax scales, disincentivizing them to work harder and to want to earn more and how obviously having significant impacts on our productivity, which has been flatlining almost in the morgue for the past four years. So four or five years. So we have to think about that.

The other point I’d make is that it was a move to take the top tier of the tax rates from 180 to 200. The 180 has been in place since 2009, that’s 15 years ago. And the people earning $180,000 now are way different to those who are earning it in 2009. Think tradies construction workers, those in the mining sector, those in the healthcare sector, a lot of people, 700,000 people extra an hour into that over that threshold. But what does it mean? It means that governments can’t seem to be able to hold the course when it comes to basic tax reform in this country that’s going to have consequences for the future.

Patricia Karvelas:

There’s no doubt that it’s a broken promise, but on this idea of whether it’s the death of tax reform, I think perhaps Richard, it shows that there is a huge difference in perspectives on what is good tax reform or not. But Richard, bracket creep is a genuine and real ongoing issue for all Australians. Wouldn’t eliminating the 37% rate actually help to address that. Isn’t that going to be an issue for lots of taxpayers?

Richard Denniss: 

No, no. I mean the idea that tax reform is dead because we’re not going to give an enormous tax cut to the highest income Australians is just ridiculous. Let’s put this into context. The highest income Australians, the people in the top tax bracket weren’t going to see a reduction in their tax rate. We were just going to give them $9,000 a year, $9,000 a year, but their tax rate wasn’t going to be any lower. So from a productivity point of view, from a participation point of view, from an economic reform point of view, this was one of the most poorly designed tax cuts in the history of economic policy. It was literally just a gift if, and it’s a giant if, but if Innes is serious about tax reform, I’ll sit down with him tomorrow and we can cook up solutions to how it is that women working part-time in Australia are facing very high marginal tax rates because of the interaction between the tax system, the welfare system, and the childcare system. That’s where we need to reform the system. That’s where we’ll get productivity boosts.

Patricia Karvelas:

Do you acknowledge though that bracket creep is an issue and that this will make it more profound?

Richard Denniss: 

Bracket creep is an issue, but this was using a sledgehammer to crack a walnut. If we wanted to increase, if we wanted to protect ourselves from bracket creep, again that’s a big if, but if we wanted to do that we could just increase the existing tax scales by the same proportion in line with inflation – there I fixed it. It would cost about a third of the stage three tax cuts.

Most of the money, most of the hundreds of billions of dollars in stage three tax cuts are going to high income earners, mainly men who weren’t going to see a reduction in their marginal tax rate at all. And seriously, if we want to talk about tax reform, Innes should be excited about talking about moving our whole tax base away from income and onto things that virtually every economist in the world supports like resource rent, taxes and carbon tax. Let’s do the hard work on tax reform.

Patricia Karvelas:

So let me just ask you one more question before I go back to Innes, which is this; Innes’s point then you perhaps partly agree with, are we relying too much on income tax in this country?

Richard Denniss:

No, that’s a statistical trick. Australia is one of the lowest tax countries in the OECD. The reason that it looks like we rely heavily on income tax is because we don’t collect as much tax on wealth. We don’t collect as much tax on pollution.

Patricia Karvelas:

So should we be changing the distribution those?

Richard Denniss:

Well if we introduced the carbon tax today our reliance on income tax would fall. If we introduced the wealth tax today as most countries have in the developed world, our reliance on income tax would fall. So to be clear, it’s a statistical trick to say that Australia relies too heavily on income tax. We’re a low tax country that because we are missing out on all the good efficient taxes like wealth taxes and pollution taxes, it makes it look like our income tax sticks out.

Patricia Karvelas:

Let me go back to you Innes. I know you will contest that it’s a statistical trick. Am I right?

Innes Willox:

Well I thank Richard for basically making my point for me. Your next question, PK.

Patricia Karvelas:

Okay, let’s go to my next question, which is where I would like to end our conversation on inflation. We don’t know all the details as we’ve said, we are reporting what we know so far, but are you worried in Innes that this may fuel inflation?

Innes Willox:

Well, the concern overall here is that, as we have said, this has been baked into the system, into the forward projections, into the thinking of treasury and governments for the past six years. We are concerned here that measures like this will impede our economic recovery and will put in danger the soft landing that we’re trying to get to with the way that this has been skewed.

The point here is that if it goes through as is reported, it is a fundamental change in what has been proposed and people have to rethink their economic situation in all sorts of different ways. Will this be inflationary? The odds are, put it this way, PK, that it’s not going to help inflation and the fight against inflation. And that’s the concern for us. And it will prolong the overall pain that we’re facing at the moment.

Patricia Karvelas:

What’s your assessment, Richard? On the inflation question,

Richard Denniss:

It’ll have a minor impact on inflation, that’s true, but there’s no way to help Australians struggling with a cost-of-living crisis that isn’t going to have some affect on inflation.

Innes Willox:

Except by putting inflation up, except by putting inflation up.

Richard Denniss:

Look Innes I understand that you need your $9,000 tax cut in a hurry, but there’s people out there that can’t afford their –

Innes Willox:

Don’t get personal. Richard.

Richard Denniss:

Well you interrupted me mate, you interrupted me. [PK: let’s keep it friendly] Well, I’m being very friendly. There are people out there who can’t afford their electricity bill today. There are people out there who can’t afford their grocery bill today. And if Innes says we should wait, we should wait until the cost of living crisis is over before we help them. Then he and everyone agreeing with him needs to understand and accept the consequences of what they’re saying. Okay? They’re saying to those people, take one on the chin for Australia. Thank you for your poverty. It’s helping us manage inflation.

Patricia Karvelas:

Alright, I want to revisit all of these conversations and a few people texting in saying that they’re happy to hear both of these different perspectives at the one time and I’m glad for it too. Thank you to both of you.

Richard Denniss & Innes Willox:

Thank you.